Whose Blood for Whose Oil?

Who will suffer the most from the disruption of the global flow of oil?

June 14, 2004

Who will suffer the most from the disruption of the global flow of oil?

Whenever I field that “blood-for-oil” question from audiences, I typically respond, “Hell yes, it’s all about oil.” But is it? Let’s look at some key facts first.

As of 2001, the planet burned just over 400 quadrillion btu of energy, that is oil, gas, coal, renewables.

Almost 40% of that total was supplied by oil. Of the oil used in 2003 by the world, just over 70% was imported from a foreign source.

The Persian Gulf itself accounted for only about a quarter of that global trade — or 17 million barrels per day (mbd) — out of a total of 56 mbd. But the Middle East accounts for just over half the known global reserves of oil.

So as the world proceeds into the future and continues to increase its consumption of oil, the Persian Gulf will account for roughly half of that increase.

Naturally, growth in oil consumption around the world will vary in the next couple of decades, and this is where things get interesting.

North America has been the global demand center of energy markets for so long we cannot imagine a future that does not place America at the head of that line. But that future is coming.

Of the 400 quadrillion btu of energy burned globally in 2001, North America burned 116 quadrillion Btu, with Asia on its heels at 113 quadrillion. But while Americans will burn only about 50% more energy by 2025, Asia’s demand will come close to doubling. That means those nations will be looking for a lot more energy from the planet than Americans will — roughly 40 quadrillion Btu more, to be precise.

By the way, a good rule of thumb for calculating quadrillion btu’s — staggering as that word may sound — is to divide that number by 2, with the result representing how many millions of barrels of oil you would need to burn each day to achieve that energy.

So 40 Quad would equal about 20 million barrels of oil per day — roughly what the United States consumed in oil in 2003, importing more than half.

By 2025, Asia will burn 211 Quad Btu, up from 113 Quad Btu currently, according to the latest U.S. Department of Energy projections. Right now, the department estimates that this need will be met with 39% coal, 37% oil, 13% natural gas and 11% renewables (such as wind, solar, hydro and nuclear power).

The 37% oil share (translating into 38 million barrels per day) will be devoted largely to Asia’s transportation needs, which are expected to grow dramatically by 2025.

This number basically implies a five-fold increase in the number of cars. Of course, if all those cars were gas-guzzling SUVs, then the millions of barrels of oil per day that Asia would need to burn would be pushed up quite a bit further.

On the other hand, if hybrids and/or fuel-cell cars capture a large share of Asia’s growing market, then the barrel number could be lightened quite a bit.

Either way, Asia produces very little oil for itself today. And by 2025, the region as a whole will import more than 90% of its oil requirements, or 35 out of 38 million barrels needed per day. That is roughly twice as much as Asia imports today (at 18 mbd).

Six OPEC members located in the Persian Gulf — Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates — control two-thirds of the proven, “conventional” oil reserves and over 90% of the excess productive capacity in the system.

Of the 18 mbd Asia imports today, just over half comes from the Persian Gulf. But of the 35 mbd Asia will import in 2025, 21 mbd — 60% — will come from the Gulf. Meanwhile, by 2025, North America’s share of Gulf exports is expected to remain steady at about 16% to 17%.

The Persian Gulf region can be expected to boost production for export from 17 mbd today to 36 mbd by 2025. And 11 of those extra 19 mbd will go to Asia — while just under three will go to North America.

That means the Persian Gulf will be the main source of oil to accommodate Asia’s rising economic prominence within the global economy.

So let’s say that in 2025 some evil mastermind decides to cripple the Gulf’s exporting of oil.

In that scenario, North America would have to go find six million barrels a day somewhere else in a global marketplace. That market has a capacity of roughly 60 mbd. Meanwhile, Asia would be shopping around for three-and-a-half times that amount.

In other words, North America would be facing the loss of roughly 7% of its total energy requirement, whereas Asia would be trying to replace almost 20% of its energy needs.

So when the United States sends its military into the Gulf to protect all that oil, it’s clearly America’s blood — but is it really their oil? Would Americans be better off just ignoring the 80% that goes elsewhere?

Of course, since most of that oil goes to fuel some of our largest trading partners in Asia (such as China, Japan, South Korea and Singapore), perhaps Americans shouldn’t get too picky about saying whose oil it really is.

As one energy security expert once told me, “If you come to my backyard and take 1,000 gallons of water out of one end of my pool, guess what? The water’s going to go down on the other end, too.”

So not only would Americans eventually feel Asia’s economic pain, but U.S. financial markets are so good at quickly processing international risk that we’d feel it first on Wall Street — long before the prices of all those Asian imports shot up.

Globalization means never having to say you’re autarkic, so here’s how I would array the co-dependent relationships. We are co-dependent with Asia because we are dependent on their willingness to buy our sovereign debt — and they depend on our willingness to buy all their exports.

But Asia is co-dependent on the Middle East, because Asia depends on the Middle East’s energy exports — and the Middle East depends on Asia’s economic growth.

When instability in the Middle East threatens to upset this apple cart — or the similar daisy chain that exists between the United States, Europe and the Middle East — then it is our obligation to step in to stop the developed countries’ economies from being damaged.

So when the U.S. military fights, the United States is not simply fighting for a level of affluence back home in the United States. In my view, such assertions are shortsighted in the extreme.

When globalization gets sidetracked by skyrocketing oil prices, it won’t be America — or Europe or even Asia — that gets left out in the cold.

It will be the developing countries, especially the poorest of the poor that suffer the most. If we were to allow the Persian Gulf to break down as global oil supplier, not only would that ravage economies there that depend desperately on the oil revenues. But most of the developing world would immediately be priced right out of the market.

I’m not talking inflation here. I’m talking about millions upon millions of lives ending prematurely, most of whom will be the youngest children and the oldest adults — just like in Iraq during all those years of UN sanctions.

Of course, nobody will call these deaths “casualties.” In fact, they won’t be called anything at all, because they won’t even be noticed. They will just be dark-skinned people dying somewhere far away.

Reprinted by arrangement with G. P. Putnam’s Sons, a member of Penguin Group (USA) Inc. from “The Pentagon’s New Map” by Thomas P. M. Barnett. Copyright © 2004 by Thomas P. M. Barnett.